I agree that it's a waste of talent and money, but how is it evil?
They insert themselves into the transactions where they can siphon off very small amounts of money over a very large number of transactions. Nobody benefits but them from what they're doing, no one walks away with something in their hands or brains by their actions.
It's legal, but it isn't right or a good thing.
Whether it's "good" liquidity or not, and whether the discovered prices actually reflect true value or not, is a discussion that seems to fairly rapidly head down an acrimonious rathole.
Thus, by definition the liquidity already has to exist (market participants wanting to buy and sell) for HFT's to profit.
The alternative to HFT is how the markets operated for decades prior to HFT companies vacuuming money out of the system--that is, quite well, and with adequate liquidity, and with lots of money still being made.
You implied that, without HFT companies, we'd be right back there, though I see now that you didn't explicitly say exactly that.
I think we've pushed this thread far enough to the right margin of the page.
I reject that premise. HFT algos are majoritarily run in markets with deep liquidity.
I struggle to see how any sector other than the financial sector would suffer if all trades happened once a second, or even once a minute. No process in the human world is going to change the value of a company quicker than that.
Liquidity keeps spreads narrow. Wide spreads are a tax paid by retail investors to a cabal of sell-side firms.
The residential real estate market is gigantic, a demonstrably functional piece of the US economy. Maybe the stock markets should work more like the real estate market. Forget about liquidity. Who needs it? Instead, we'll just pay seven percent of every transaction to an "agent".
Maybe, without just saying "they provide liquidity" and leaving it at that, you can explain how the post-HFT world is better for anyone but the HFT companies?
If you can't explain it in pretty simple language why HFT-level liquidity is beneficial to society as a whole--to the people working in shops, managing restaurants, dealing in real estate, and on and on--then I'm inclined to think you're just trying to bluster about it.
Here, another hint: you can use the search box on the bottom of this page to find comments from me quoting Vanguard.
Either way, since you've accused me now of simply making things up to win arguments, I think I can let you off the hook. There's not much point in us discussing things further.
I also don't think, if it's that simple and obviously good for society as a whole, that it should be that hard to simply explain your position.
HFT has made trading cheaper for the vast majority of market participants. It has done this at the expense of the previous regime that was less efficient and more squalid.
Further, don't take my (or his) word for it. Listen to Vanguard which has a sterling reputation for caring for the interests of their clients who tend to be long term, small scale, investors and large pension/retirement funds.
http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-f...
For a more detailed description of the mechanics and motivation behind market making, I recommend "A High Frequency Trader's Apology": https://www.chrisstucchio.com/blog/2012/hft_apology.html
If traders, be they high-frequency or otherwise, can't make money by making liquidity available, they won't do it. Less liquidity means wider spreads, which means higher costs especially for smaller transactions (i.e. individual investors).
You could reasonably argue that HFT has caused expenses to increase for large investors who need to buy or sell large volumes of shares. But to the extent that is true, it is like saying that large investors used to get on average an unreasonably good deal at the expense of their counter parties. As in any free market, an especially good price for one party is by definition an especially bad price for the other party.
Be very clear what you mean when you say this. Because the vast majority of the time when people talk about HFT, the only way the "insert themselves" into transactions is by acting as the counter party to one side of the transaction.
In this context they add a lot of value to the system, they smooth the demand curves in time and take on some of the risks of warehousing supply.
The Fed has said as much recently.
I'm not sure who is making that claim, but I think what they are implying is that HFT "provides liquidity cheaper than the previous system of pit traders" or even "fragmentation of exchanges has dramatically brought down exchange fees at the cost of added complexity for liquidity providers (and possibly liquidity consumers). Only HFT systems could have cheaply dealt with this new complexity".
In any case, I'd sum it up as "it is cheaper to trade now after the rise of HFT than at any other time, at least some of that is because they can market make more efficiently than a dude in a vest". Vanguard for one agrees with me (http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-f...).
What many critics have claimed is that this has come at the cost of an increase in volatility, especially in the form of flash crashes and it is unclear as of yet if that is better/worse than the traditional liquidity crunches we saw under the previous regime and still see in markets not dominated by HFT.
The Fed was specifically talking about this in the context of treasury bond (and futures) volatility and a skeptic might wonder which is more likely to have caused volatility in the treasury markets, HFT or unprecedented fed monetary policy.
None of which is germane to the question of what the OP meant when he said that HFT insert themselves into transactions.
1) It is a front running operation.
2) It has no "social benefit".
3) It increases volatility or structural instability.
Items 2 & 3 are not germane to the question of "it is a front running operation".
My response to item 1 is simply, no it's not. If you state it is, then either you have an unclear understanding of how market mechanics work, or a specific natural opposition to HFT systems. When the OP said that HFT "insert themselves into transactions", I really wanted him to clarify if he meant "insert" in the sense that he thinks they can change a standing order based on new orders before they execute, or the more general sense of "inserting themselves" that any middleman does in any commercial transaction. That is, as an expert in sourcing/warehousing/etc items that have varied demand curves.
Your response (and the fed's part in it) seemed to muddle the responses to items 2 and 3. My answer (and the common one) to item 2 is that it provides liquidity cheaper than the prior regime. That is largely not debated, though it is an open question of whether you could provide the same liquidity even cheaper within some other environment (batch auctions etc).
The question of whether HFT contributes to high volatility vs acts as a response to it is much more nuanced and I suspect unanswered/unanswerable, but the problem with the Fed specifically speaking to it, is that the Feds own actions are at the heart of the question as well. A given bank or investment fund service is unlikely to have the systematic impact of the Fed.
Finally, notice that the Fed did not speak to whether HFT lowers the cost of trading (ie item 2) they only spoke to the volatility question. So using the Feds statements as a counter to the argument that HFT lowers the cost of trading does not work.
As for the criticisms focusing on volatility vs liquidity, to me they are linked, because in those instances of flash crashes that are the target of the recent criticisms, the issue has been that volatity increases due to HFT algorithms withdrawing from the market (i.e. reducing liquidity).
Also, there are other criticisms of HFT's beyond those three, including the "coincidence" that HFT firms seem to be responsible for most of the major order spoofing. Regulators have been VERY slow and uneven about enforcing HFT spoofing, but are finally catching on, albeit with slaps on the wrist (excluding Citadel being banned in China).
I'm some what receptive to the argument that HFT makes the laws harder to enforce, given that the laws rely on "intent" which is murky with algos, but how do we square that in the face of any innovation?